Media reports have been swirling around the biggest banks as of late, as mortgage activity slows, trading revenue drops, and legal hassles continue to embroil the likes of JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Citigroup, and Wells Fargo (NYSE:WFC). The underscored message to investors seems to be: Don't expect much from big banks' third quarter earnings this year. Of the four, analysts have slashed the earnings expectations for Bank of America the most since early July, cutting their outlook of the bank's third-quarter earnings by 27%.
Now that JPMorgan and Wells have announced earnings, investors have a better idea of how badly these problems have affected the bottom line of each of those banks, and they can also get some insight into how Bank of America will fare in each of the three aforementioned categories when it releases its own third-quarter report on Wednesday.
1. Mortgage activity
The lack of mortgage refinancings and originations left its mark on Wells, not unexpected since the bank is the industry leader in that business. Mortgage-related income dropped 43% from the linked quarter, and originations fell from $112 billion in the previous quarter to just $80 billion.
JPMorgan also saw decreases in its mortgage banking section, with net revenue of of $2 billion compared with the linked quarter's $3.1 billion. Noninterest revenue was much lower, too: $877 million for Q3, compared with the second quarter's $1.9 billion.
There's a good chance that Bank of America will suffer from the mortgage downturn, too, but the damage could be less than investors expect. Despite having myriad problems associated with its mortgage business since the financial crisis, B of A has worked hard to increase their market share. At a recent conference, the bank noted that it has grown its presence to an estimated 5.2% of the market, compared with 4.1% just a year ago. Much of this is due to its heightened emphasis on cross-selling, a skill that the bank seems to be sharpening.
2. Trading revenue
Trading revenue doesn't loom large in Wells Fargo's world, but is a bigger part of the picture for JPMorgan and B of A. JPMorgan noted a decrease in fixed-income and equities revenue of $4.6 billion, down from the second quarter's $5.4 billion. That revenue number includes income from the bank's commodities section, which is not teased out from the fixed-income sector -- and is being sold by JPMorgan as it exits the physical commodities business.
Bank of America reported its cumulative trading revenue in the second quarter as $3.5 billion, and it's likely that it will also suffer some reduction in that sector, though probably not as large as JPMorgan's. Analysts had previously cut net income expectations by a mere $128 million for B of A, compared with an anticipated decrease of $526 million for JPMorgan, based on a predicted drop in trading activity.
3. Legal costs
This is the biggie this time around, and so far JPMorgan has taken a beating for its mounting legal bills. In the bank's third-quarter conference call, CFO Marianne Lake admitted that even the bank's management was caught off guard by the $9.2 billion legal tab. She noted that the bank currently has about $23 billion in its reserve account.
For once, Bank of America's legal morass may command less attention because of JPMorgan's high litigation expenses, but investors shouldn't rest easy just yet. B of A has a number of legal issues still simmering, namely its ongoing litigation regarding a 2011 settlement of $8.5 billion with 22 institutional investors over disintegrating mortgage bonds -- which could end up costing the bank much more than the original amount if the settlement is overturned.
Recently, another previously settled case was reopened. The Federal Deposit Insurance Corporation has objected to a $500 million settlement B of A reached earlier this year with a number of pension funds. This settlement, which the bank has hoped would take care of 80% of claims against Countrywide mortgage-bond products, is getting another look because of the FDIC's claim that there was a conflict of interest by a number of the plaintiffs involved in the negotiations.
Along with its peers, Bank of America also faces a slew of losses regarding Federal Housing Administration-backed mortgages that may not be covered by the FHA if any underwriting flaws are discovered. According to American Banker, banks haven't been holding reserves against these loans and could lose big time if the mortgages went into foreclosure. Not surprisingly, B of A holds the lion's share of these loans, which could present another sticky legal problem for the bank -- and its investors -- in the near future.
Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.